Asset Liability Management in Banks

The banking industry has undergone major upheaval in recent years, largely due to the lingering recessionary environment and increased regulatory environment. Many banks have failed in the face of such tough environmental conditions. These conditions

Fraser, L. M., & Ormiston, A. (201). Understanding financial statements (9th ed.). Upper Saddle River, NJ: Prentice Hall.

The balance sheet (BS) is significant to a business due to its ability to provide a “snapshot” of a company’s assets and liabilities at any given time. This financial document is a cursory representation of a business’s health. The use of comparative BS whether it be yearly, quarterly, or monthly provides the interested parties a tool to observe trends that are positive, negative, or neutral to a company’s financial health (Finkler, Jones, and Koyner,2013) .

The balance sheet, also known as the statement of financial position, includes an analysis of all the firm’s assets and liabilities. The balance sheet is a description of the firm’s financial standing at an instance in time. When navigating through a balance sheet one notices that it is divided into two sections, the left side includes all of the firm’s assets and the right side lists all of the firm’s liabilities. A firm’s assets accounts for the cash, property, inventory, facility, equipment, and other investments the firm has made in order to operate. The liabilities of a firm are the legal debts and obligations the firm obtains during its course of business. Included on the side of liabilities is the stockholders’ equity, which accounts for the difference between the firm’s assets and liabilities. Stockholders’ equity is a measure of the net worth of a firm. The expression “balance” sheet describes the equilibrium set by the balance sheet identity:

A Balance Sheet is a snapshot of an organization’s assets, liabilities, and owners’ equity at any given time. It allows the stakeholder’s to see the company's financial condition, as well as, presenting what is owned and owed. Assets are the things that are owned, and are referred to as capital. Liabilities are the amounts owed to others. In order to get an accurate picture, one must look at the whole document, and make comparisons amongst different line items.

The growth of the bank’s revenue for its shareholders, is also as a result of the respect the bank has on delivering quality services, respecting the views of everyone involved in their business, having a leadership system that is easily approachable, being

“ The fact is that one of the earliest lessons I learned in business was that balance sheets and income statements are fiction, cash flow is reality” (Chocola, C 2014). Chocola is eluding to the possibility of a profitable company failing due to lack of cash flow. Cash flow is an accurate indicator of a company’s stability. The discrepancy between the balance sheet, income statement, and cash flow is due to revenue from sales being recognized on the balance sheet and income statement before it is collected. However, until the income from the sale is received there is no cash flow to reinvest, produce additional product to be sold, or to pay expenses. It is necessary to establish a positive cash flow before considering expanding a business.

In review of the Comparative Balance Sheets for years 12 and 11 I have gathered the following information:

Reports the variance in the main income statement and balance sheet accounts and the reasons thereof.

The key components of the balance sheet reflect the financial position shown in the three permanent accounts: assets, liabilities, and owners’ equity. Assets are listed from most liquid to least liquid- liquidity meaning the closest or quickest form of cash. That being said, current assets are defined as cash, marketable securities, accounts receivable, inventory, and prepaid expenses. The opposite of assets, liabilities represent current and noncurrent obligations for which the company is committed. Current liabilities can include accounts payable, taxes payable, and salaries payable. Noncurrent liabilities represent commitments that extend longer than one year, such as bank loans, bonds and lease obligations. The final account on the balance sheet is owners’ equity. This represents the blood, sweat, and tears that the owner put into the company in an effort to realize a vision and see it come to fruition. The poetic version aside, owners’ equity also represents the

Extensive research has determined that the banking industry is in an unstable state. The industry’s profits have

The balance sheet comprehend the T account is equally valuable to examine. There are two sides of the T account report, the left side indicates the debits and right side indicates the credits. According to the 2009 unaudited balance sheet, a wrong amount of $13,797,000 was entered: after a corrected amount entered of $14, 797,000, the numbers reveal a discrepancy of $1,000,000. The operations income was $6,890,000 and the entry $3,110,000, reveling a discrepancy of $2, 540,000. A negative effect will result in the debit side, as wrong account entries on the balance sheet. The organization will overspend, and the resources allocated according to these improper entries, as mistakes in managerial decisions will occur.

These banks should ideally be divested of any sort of commercial interest, and must act in the best interest of its nation’s economic stability. A lot of meaning is carried out in being identified as ‘independent’ authority, where the bank possess powers to take its own decisions, approve its own legislature, follow its own policies and offer stability to the nation’s economy.

Throughout all business, there is a basic accounting equation that is used to account for what a company owns and what it owes. This equation allows the business to report what the business looks like in financial terms. Businesses exist to provide a service or product to the consumer; however, it must account for how it accomplishes this task. Keeping accurate accounting report policies in place to help provide transparency to creditors who may have a vested interest in the business. The basic accounting equation is “Assets = Liabilities + Stockholders’ Equity (Weygandt, Kimmel, Kieso, 2007. p. 14)”.

Deregulation, innovation and globalisation has changed the way banks run from asset management to liability management, as well as the change from ‘mono’ to ‘multi-tasking’ and the increased competition in the sector as well as risk. The banking system has evolved drastically from the traditional mono-tasking institution to what it is now. This change in roles of asset and liability management could be one of the main reasons behind the global